Merck Beats Estimates and Raises Guidance, But Stock Plops 2%

The company fell 1.3% to $63.19 in early morning trading Friday despite beating both earnings and revenue expectations for the second quarter.

Merck's per share earnings came in at $1.06 and revenues totaled $10.5 billion, which both beat Wall Street's expectations. Analysts' estimates for the company's EPS came in at $1.03 while the consensus for revenues was $10.28 billion, according to FactSet.

Management also raised its EPS guidance for the rest of the year to a range of $4.22 to $4.30 from its previous estimate of $4.16 to $4.28.

Earlier this month, Merck announced price cuts on several of its products, joining Pfizer (PFE) as the only large-cap pharma companies to either halt or cut price increases at least for the immediate future. Pfizer said it would postpone price increases it had implemented July 1 after President Trump tweeted at the company, criticizing them for the decision.

Merck pledged to cut its hepatitis-C drug Zepatier price by 60% alone. Zepatier, one of the company's main products in its virology business, generated $113 million in the second quarter, which was a 13.8% drop from the the same time last year. The company anticipates this trend to continue as the number of patients are expected to decline year-over-year in the future, according to a Merck press release.

SunTrust analyst John Boris doesn't think Merck's decision will affect business because the company has enough legacy brands in its portfolio to generate revenue and has defied the odds by achieving "top/bottom-line growth" despite cutting prices in 2017, according to a note Boris wrote.

He reiterated his "buy" rating on Merck and maintained his price target of $74.

Revenues grew 4.3% from the first quarter of 2018 with Mercky's Keytruda cancer treatment and animal health business unit leading the growth.

Keytruda sales soared by 89% to $1.67 billion from the same time last year. The immunotherapy drug brought in $881 million the previous second quarter. Keytruda remains Merck's most promising pipeline option as the company continues more launches across different indications.

Some of the top indications the company prioritizes Keytruda's use with are for breast cancer and gastric cancer right now, Adam Schechter, president of Merck's global human health operation, said on the company's earnings call with analysts.

"You really never seen a situation in oncology like what we have right now with Keytruda because this is the first time you have a drug that is crossing so many different tumor types," Rob Davis, CFO for Merck, noted.

The stock has increased by 13.8% year to date. Over the past year, Merck has outperformed the S&P 500, gaining 14.5% year compared to 3.6% for the S&P 500.

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